Powell, Mnuchin stress limits of current emergency lending programs

Federal Reserve Board Chair Jerome Powell and Treasury Secretary Steven Mnuchin told lawmakers Tuesday that the struggles faced by thousands of small businesses and some hard-hit sectors are beyond the scope of lending authorities.

In Tuesday testimony before House lawmakers, Powell and Mnuchin asserted that the Fed and Treasury lack the legal or logistical abilities to expand certain emergency lending programs to a wider range of borrowers. 

The Fed and Treasury are facing rising pressure from both Democrats and Republicans to broaden the scope of programs meant to help businesses and local governments secure enough cash to stay afloat and prevent layoffs until the economy recovers. Those programs are backed by $454 billion allocated by Congress through the $2.2 trillion March economic rescue bill, much of which has gone unused.

Even so, Powell and Mnuchin argue that direct fiscal support from Congress may be the only solution to bolster the smallest U.S. businesses and certain industries, even as such support has become increasingly unlikely to reach President Trump’s desk before Election Day.

“There is a lot of work to do there and our policies will support that, but it will go faster for those people if it’s all of the government working together,” Powell told the House Financial Services Committee.

Powell and Mnuchin’s appearance comes as Democrats and Republicans remain locked in a stalemate over another stimulus bill despite broad bipartisan agreement over the need for further economic support. 

Roughly 11 million Americans have not yet found work after losing their jobs due to the onset of the pandemic. Thousands of small businesses that survived the first months of lockdowns are beginning to fold, and the dining, hospitality, travel and entertainment industries in particular will likely take months to fully recover.

Members of the Financial Services panel pressed Powell and Mnuchin on Tuesday to fill the void through the Main Street Lending Program (MSLP) and Municipal Liquidity Facility (MLF).

The Fed launched the MSLP and MLF earlier this year as part of an unprecedented extension of emergency loans across the U.S. economy. The MSLP is meant to help businesses in good standing before the pandemic access enough cash to make it through to the other side, and the MLF is meant to help cash-strapped state and local governments prevent layoffs and service cutbacks.

Both programs, however, have failed to meet the high hopes set by their arrival. The MLF has only purchased two rounds of municipal bonds for a total $1.7 billion as of Sept. 18, barely scratching the $500 billion allocated for the program, and the MSLP has financed just $1 billion of the $600 billion it is authorized to extend.

“Let me be blunt. This pandemic response has fallen badly short,” said Rep. Maxine Waters (D-Calif.), chairwoman of the Financial Services Committee.

Waters and several of her colleagues in both parties urged Powell and Mnuchin to lower the minimum threshold for an MSLP loan from the $250,000 currently set by the Fed. Doing so, they argue, would allow businesses too large or ill-suited for the Paycheck Protection Program (PPP) to find support.

“Many businesses and lenders are reporting to us in Congress that the program is not working for them,” said Rep. Andy Barr (R-Ky.). “An argument can be made that the program isn’t performing to its full potential.”

While Mnuchin said he would support lowering the minimum loan for the MSLP, Powell said that lending at a smaller level would require a new lending facility that breaks from the Fed’s history of dealing with primarily larger firms.

“Lending at the very small end,” Powell said, “tends to involve a lot of personal guarantees. You’re lending to a person and that person is guaranteeing what is a very small business. And that’s just that’s not a facility that we currently have. We’d have to start from scratch to develop that.”

Powell and Mnuchin also shot down expanding the program to consider loans secured by collateral instead of measures of past and potential earnings, drawing the ire of some lawmakers who say their constituents are running out of options.

“There’s nothing else for these people to turn to,” said Rep. Vicente Gonzalez (D-Texas). “Right now, we have money on the table, programs that are not being used.”

Powell defended the limited loans issued by the programs by pointing to substantial recovery in private lending that has occurred since the Fed rolled them out. The Fed chair emphasized that the emergency facilities were meant to be a backstop for creditworthy borrowers who couldn’t access credit from banks or other private lenders, not the main source of liquidity for struggling companies.

Mnuchin also expressed support for taking some of the unused billions in credit protection authorized by Congress and moving it toward other lending or grant programs. But, he insisted, that would require legislation.

“Unfortunately, I think, there’s not more we can do,” he said. 

“Trying to underwrite the credit of hundreds of thousands of very small businesses — it would be really difficult and I think PPP is a better way to approach that,” Powell added.